Alpha Box Property Holdings Limited (in liquidation) v Wiekart
[2015] NZHC 1257
•8 June 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-2390 [2015] NZHC 1257
UNDER the Companies Act 1993 IN THE MATTER
of the liquidation of Alpha Box Property
Holdings LimitedBETWEEN
ALPHA BOX PROPERTY HOLDINGS LIMITED (in liquidation)
First Plaintiff
HENRY DAVID LEVIN and VIVIEN JUDITH MASDEN-RIES
Second Plaintiffs
AND
CARL WIEKART Defendant
Hearing: 24 - 27 November 2014 Appearances:
K H Kuang and J V Angelson for Plaintiffs
Defendant in personJudgment:
8 June 2015
JUDGMENT OF M PETERS J
This judgment was delivered by Justice M Peters on 8 June 2015 at 2.30 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Meredith Connell, Auckland
Copy for: C Wiekart, Auckland
ALPHA BOX PROPERTY HOLDINGS LIMITED (in liquidation) v WIEKART [2015] NZHC 1257 [8 June
2015]
[1] The Plaintiffs (“Alpha Box” and “the liquidators”) seek an order that the Defendant (“Mr Wiekart”) contribute a sum to the assets of Alpha Box by way of compensation.1
[2] Alpha Box was incorporated on 9 May 2005. It failed to pay GST due to the
Inland Revenue Department (“IRD”) for the periods ending 30 November 2007,
31 January 2008 and 31 March 2008. On 7 May 2010, on the application of the IRD, the Court ordered that Alpha Box be wound up and appointed the Second Plaintiffs as its liquidators. Mr Wiekart is, and at all material times has been, the sole director and shareholder of Alpha Box.
[3] The issues which arise are:
(a) whether Mr Wiekart breached one or more of the duties he owed in his capacity as director of Alpha Box;
(b) if so, whether I should make an order pursuant to s 301(1)(b)(ii)
Companies Act 1993 (“Act”); (c) if so, in what amount.
[4] The liquidators’ case is that between 1 October 2007 and 31 March 2008
Mr Wiekart caused or allowed Alpha Box to advance more than $1 million to companies within what is referred to as the “Circle Group” (“Group companies”), those loans being unsecured and the terms of them being undocumented.
[5] The liquidators submit that, in making or permitting these advances, Mr Wiekart breached the following duties to Alpha Box:
· to act in good faith and in what he believed to be the best interests of
Alpha Box – s 131(1) of the Act;
· to exercise his powers for a proper purpose – s 133 of the Act;
·to refrain from causing or allowing the business of Alpha Box to be carried on in a manner likely to create a substantial risk of serious loss to Alpha Box’s creditors – s 135(b) of the Act;
·to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances – s 137 of the Act.
[6] If the liquidators are able to make out one or more of the breaches they allege, then the Court may make the order to which I have referred in [1] above. In this particular case the liquidators seek an order pursuant to s 301(1)(b)(ii) of the Act, which provides:
301Power of court to require persons to repay money or return property
(1) If, in the course of the liquidation of a company, it appears to the court that … a past or present director … of the company, has …been guilty of … breach of duty … in relation to the company, the court may, on the application of the liquidator …
(b) order that person—
(i) ...
(ii) to contribute such sum to the assets of the company by way of compensation as the court thinks just;
…
[7] Mr Wiekart’s case is that the payments were not loans but were payments made by Alpha Box to meet its share of expenses that each Group company had incurred in the course of generating revenue that was earned by Alpha Box. His evidence was that Group companies undertook a variety of tasks for Alpha Box, hence the payments. Mr Wiekart denies any breach of duty accordingly.
Background
[8] Alpha Box carried on business as a property investment and trading company, buying residential properties and selling them, predominantly to “mum and dad” investors. Mr Wiekart was the sole director and shareholder of Alpha Box,
and a shareholder and/or director in other Group companies, along with his business colleague, Mr Mark Saunders.
[9] Mr Wiekart’s evidence is that the companies operated as a group and that in the course of 2007 it became apparent that market conditions were changing for the worse. The number of “leads” from the Group’s call centre operations had diminished to such an extent that by the end of October 2007 Mr Wiekart and Mr Saunders had decided that the Group’s operations should be wound down and that Alpha Box and other Group companies should then cease trading.
[10] Mr Wiekart’s evidence is that he notified the Group’s accountants, WHK Gosling Chapman (“WHK”), and staff of this decision; that the call centre and other aspects of the business were wound down; and that Alpha Box completed sales of its properties (some of which were already subject to agreements for sale and purchase), with the income paid to Alpha Box being the last it would receive.2 All such income had been received by 31 March 2008.
[11] The companies, again including Alpha Box, ceased trading just before
Christmas 2007.
[12] In the course of receiving the proceeds of sale of its various properties, Alpha Box made the various payments to Group companies that are in dispute and which the liquidators characterise as the undocumented, unsecured loans to which I have referred. In a succession of payments between 1 October 2007 and 31 March
2008, Alpha Box transferred $1,021,692.83 as follows:
(a) $639,072.70 between 1 October 2007 and 30 November 2007;
(b) $363,307.01 between 1 December 2007 and 31 January 2008; and
(c) $19,313.12 between 1 February 2008 and 31 March 2008.
[13] The sums transferred to the companies within the Group over this six month period were:
· Circle Management Limited – $326,617.14;
· Circle Asset Group Limited – $426,500;
· Circle Asset Group Christchurch Limited – $141,750;
· Circle Realty Limited – $9,000;
· Circle Construction Limited – $43,000;
· Get Smart Planning Services Limited otherwise known as Circle
Financial Management Limited – $23,000;
· Western Park Developments Limited – $23,100;
· Max Plan New Zealand Limited – $21,725.69; and
· Circle Finance Limited – $7,000.3
[14] The financial statements for many of these companies for the year ended
31 March 2007 suggest that they were “related” to Alpha Box. Whatever the term “related” might signify in financial statements, few if any of the companies were related to Alpha Box within the meaning of s 2(3) of the Act. Nothing turns on the matter in any event.
[15] What is important, however, is that at the material times Mr Wiekart was a director and shareholder of Circle Management, Circle Asset Group Christchurch, Circle Financial Management and Western Park Developments. He was also a shareholder of Circle Asset Group, Circle Realty, Circle Construction and Max Plan, and he was a director of Max Plan until February 2008. Mr Wiekart was familiar
with the roles and financial position of each Group company and consistently with his evidence that the payments were to meet expenses incurred on behalf of Alpha Box, said that there was no intention or expectation that Alpha Box would ever try to recover the funds transferred, let alone recover them in fact.4
[16] In the course of the six month period in issue, Alpha Box was incurring liabilities to return GST to the IRD as follows:5
(a) $73,104.33 for the period ending 30 November 2007; (b) $19,415.24 for the period ending 31 January 2008; and
(c) $24,150 for the period ending 31 March 2008, with a credit of approximately $7,000 applied to give a core GST liability of
$108,947.79.
[17] Although Alpha Box’s returns for these periods and the GST itself were due shortly after the end of each period, in fact the returns were not filed until February
2009, that is a year or so later than the due date.
[18] The evidence before me includes emails exchanged by Mr Wiekart, Mr Saunders and WHK in the course of 2008 as to tidying up financial aspects of the cessation of trading, including various journal entries in Alpha Box’s MYOB general ledger (“general ledger”) to 31 March 2008, to which I refer below, and the filing of the GST returns which the IRD was pursuing.
[19] On 11 May 2010, shortly after the order to wind up had been made, Mr Wiekart made an offer (not accepted) to pay the GST by way of a lump sum of
$38,000 and the balance by subsequent instalments.6
[20] With the exception of Circle Realty and Max Plan, all Group companies were placed in liquidation on 29 June 2011, by special resolutions by shareholders to wind
4 Evidence of C Wiekart, above n 2, at 83.
5 Alpha Box Property Holdings Ltd GST returns for periods ending 30 November 2007,
31 January 2008 and 31 March 2008 at ABD 477, 478 and 479.
6 Email from C Wiekart to Deloitte dated 11 May 2010 at ABD 548.
up. Mr Wiekart’s evidence is that such debts as those companies owed to third parties totalled no more than $5,000.7 The liquidators do not accept that but again nothing turns on the point.
[21] The IRD is the sole creditor in the liquidation. It has lodged a proof of debt for $185,974.61 comprising:8
(i) A preferential claim for Court liquidation costs of $3,149.91; (ii) A preferential claim for [the core GST of $108,947.79]
relating to the tax periods ending 30 November 2007 to 31
March 2008; and
(iii) An unsecured claim for interest and penalties accrued on the unpaid core GST debt up to liquidation, totalling
$73,876.91.
Evidence
[22] The inter-company transfers at issue in this proceeding were not a new development. As the liquidators submit, those transfers were always represented as inter-company advances in the company’s financial records, that is as an advance, say from Alpha Box to Circle Management or to Circle Asset Group etc.
[23] This appears from the financial statements for each Group company to
31 March 2007, those statements also showing the corresponding balance as at
31 March 2006. The statements record the transfers as “Related Party Receivables” and “Related Party Payables” (that is debts due from/to the individual Group companies).9 Moreover, these financial statements were prepared by WHK, a well known firm of accountants.
[24] Taking Alpha Box as an example, its financial statements to 31 March 2007 record Related Party Receivables of $847,499 and Payables of $274,649.10 Note 7 to
the statements breaks down both sums, recording Receivables of $184,391 from
7 Evidence of C Wiekart, above n 2, at 77.
8 Brief of Evidence of H D Levin, above n 3, at [4.5].
9 Alpha Box Property Holdings Ltd General Ledger for period 1 October 2006 to 31 January 2007 at ABD 114.
10 Alpha Box Property Holdings Ltd Financial Statements for year ended 31 March 2007 at
ABD 107.
Circle Financial Management, $472,861 from Circle Asset Group, $94,340 from
Circle Asset Group Christchurch and so on.11
[25] Note 7 also states:12
The following material transactions occurred with related parties during the year:
Advances were made to and from the related parties of Alpha Box Property
Holdings Limited.
Interest was charged on intercompany advances at year end at the prescribed rate of interest according to Section ND 1F of the Income Tax Act 2004.
(Emphasis added)
[26] Mr Wiekart signed the statement of financial position included in
Alpha Box’s financial statements to 31 March 2007, and did so on 23 September
2008 after protracted email correspondence with WHK. Accordingly, he must have been satisfied, at least at that time, that the statements were a true and accurate reflection of the matters they disclosed. Similarly with the other financial statements he signed for that year for Circle Management, Circle Realty, Circle Asset Group
Christchurch and Circle Financial Management.13
[27] This treatment of inter-company transfers as loans was continued in the general ledger. Each Group company had an “account” within the ledger, the “Beginning Balance” of which as at 1 April 2007 was the sum due to or from that company as recorded in Alpha Box’s financial statements to 31 March 2007. Accordingly, the opening balance for Circle Financial Management’s account in Alpha Box’s general ledger as at 1 April 2007 was the receivable of $184,391 referred to above. All subsequent transfers between the two companies were applied to that balance.
[28] For some reason not satisfactorily explained, the closing balance on each
Group company’s account in Alpha Box’s general ledger was consolidated and
“transferred” to Circle Management’s account in the ledger as at 31 March 2008.
11 ABD 109.
12 ABD 109.
13 Financial Statements for Circle Management, Circle Realty, Circle Asset Group Christchurch and Circle Financial Management at ABD 22, 33, 54, 61, 103.
Accordingly, the closing balance of Circle Management’s account in the general ledger at year end was $626,090.67 with nil balances shown for all others. The liquidators’ demand of Circle Management for payment of the debt was not met.14
[29] In summary, the contemporaneous accounting documents support the
liquidators’ submission that the payments were loans by Alpha Box.
[30] The liquidators also rely on the fact that many of the payments were “round” sums, and submit this too is indicative of a loan rather than payment of an expense. By way of example:
(a) On 17 October 2007 Alpha Box paid $5,000, $7,000 and $54,000 to Circle Asset Group, Circle Finance and Circle Asset Group respectively.
(b)On 24 October 2007, Alpha Box paid $4,000 to Circle Realty, $6,000 to Circle Construction and $59,000 to Circle Asset Group.
(c) On 7 November 2007, Alpha Box paid $72,000 to Circle Asset Group.
(d) Alpha Box paid another $33,000 to Circle Asset Group on
14 November 2007, $45,000 to Circle Asset Group on 21 November
2007 and paid $11,000, $12,000 and $43,000 to Financial Management, Circle Asset Group and Circle Asset Group Christchurch respectively on 28 November 2007.
[31] Next, the liquidators refer to statements that Mr Wiekart made to them in a Business Profile and Statement of Financial Position for Alpha Box that he provided on 11 May 2010, four days after the company was placed in liquidation.15 In the Business Profile Mr Wiekart advised that Alpha Box had “advanced” funds to Circle Management and in the statement of Financial Position he recorded a debt due from
Circle Management to Alpha Box of $626,091.16 Mr Wiekart signed the forms, as
14 Letter of Demand sent from Liquidators to Circle Management dated 11 May 2010 at ABD 547.
15 Business Profile Questionnaire and Statement of Financial Position at ABD 516 and 530.
16 At ABD 525 and 535.
verification that the information provided was true and correct to the best of his knowledge.
[32] Mr Wiekart acknowledges that all of this evidence points to the fact that the payments were loans. Despite this, Mr Wiekart maintains that the transfers were legitimate payment of expenses. Consistently with this stance, Mr Wiekart’s evidence was that in the first instance he completed the forms provided to the liquidators on the basis that no advances were owed to Alpha Box. He then consulted WHK, who informed him that “technically” Circle Management was indebted to Alpha Box and it was at that point Mr Wiekart realised how the
movement of funds had been treated.17
Discussion
[33] Alpha Box’s contemporaneous financial records support the liquidators’
submission that the transfers are to be treated as loans.
[34] It may be that there is some merit in Mr Wiekart’s evidence that Alpha Box could be expected to contribute to costs incurred by other Group companies which resulted in revenue to Alpha Box. That, however, is not how Alpha Box chose to structure its affairs at the material time.
[35] Quite aside from that, there is no evidence before me that would allow a determination of whether the payments were of expenses incurred for Alpha Box and that the sums paid did not exceed those properly due from Alpha Box. There is a complete absence of documentation which confirms Alpha Box’s liability to contribute and to contribute in the amount it did.
[36] Moreover, some of Mr Wiekart’s evidence gives cause for concern. For instance, Mr Wiekart gave evidence that “towards the end”, Alpha Box “paid a predominant amount” of the expenses because it was the “main property supplier”.18
That is no justification whatsoever. In addition, Group companies occupied premises
in Auckland under a lease held by Circle Asset Group. The term of the lease, and
17 Evidence of C Wiekart, above n 2, at 63 and 64.
18 Evidence of C Wiekart, above n 2, at 95.
therefore Circle Asset Group’s obligations, continued beyond 31 March 2008. Mr Wiekart said in evidence that he and Mr Saunders had personally guaranteed Circle Asset Group’s obligations to the lessor and that Alpha Box put Circle Asset Group in funds so that there was no default. This suggests self interest in this payment at least. Similarly, some of Alpha Box’s funds were applied to repay or reduce a facility granted to Mr Saunders’ parents and secured against their home. Mr Wiekart’s evidence was that the facility had been used for the purposes of the Group, but was unable to provide information beyond that.
[37] To conclude, not only did Mr Wiekart fail to discharge the evidential onus on him to establish that the payments were expenses, some of his evidence raises concerns as to how the funds were applied.
[38] I propose to proceed on the basis that the payments were undocumented, unsecured loans, made with no prospect of repayment. If I am wrong in that, the payment of such substantial sums in the course of winding down, without documentation as to liability and quantum, constitutes a breach of one or more of the duties relied upon.
Duties
[39] As I have said, the liquidators allege breaches of the duties in ss 131(1), 133,
135(b) and 137 of the Act, as follows:
131Duty of directors to act in good faith and in best interests of company
(1) … a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
...
133 Powers to be exercised for proper purpose
A director must exercise a power for a proper purpose.
135 Reckless trading
A director of a company must not—
...
(b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
137 Director’s duty of care
A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—
(a) the nature of the company; and
(b) the nature of the decision; and
(c) the position of the director and the nature of the responsibilities undertaken by him or her.
[40] Mr Wiekart must have known that Alpha Box was accruing a liability to pay GST on some or all of the proceeds of sale that it received. It would have been a straightforward matter to calculate or estimate the gross liability for GST by reference to Alpha Box’s receipts, and to ensure that sufficient funds were retained to meet the sum expected to be due. Indeed, Alpha Box recorded the GST it collected on sales and paid on purchases in its general ledger for the year ended 31 March
2008.19
[41] Despite this, Alpha Box paid away all of its funds, the last such transfer being of $1,663.12 to Circle Management on 28 March 2008. That left a balance of $7.50 in Alpha Box’s account – taken by the bank as a fee.20
[42] On the facts of this case I am satisfied that Mr Wiekart:
(a) did not act in good faith and in what he believed to be in the best interests of Alpha Box, and Alpha Box alone;
(b) did not exercise his power to make advances for a proper purpose;
19 Alpha Box Property Holdings Ltd General Ledger 1 April 2007 to 31 March 2008 at 13 and 14.
20 Bank statement for Alpha Box Property Holdings Ltd at ABD 418.
(c) failed to exercise the care, diligence, and skill that a reasonable director would have exercised in the same circumstances taking into account the matters referred to in s 137 of the Act.
[43] A similar situation was before the Court in Blanchett v Keshvara.21 In that case, the liquidators of APG Holdings Limited alleged that Mr Keshvara, one of APG’s former directors, had breached his duties to the company by permitting it to make advances totalling approximately $1.4 million. As in this case, there was an absence of documentation and security. Venning J determined that each advance was made in breach of the duty in ss 131, 133 and 137. So too in the present case.
[44] Given these findings, it is unnecessary for me to address the issues which would otherwise arise under s 135(b).
Section 301 Companies Act 1993
[45] Having determined that Mr Wiekart breached the duties to which I have referred, I have discretion as to whether to make an order pursuant to s 301(1)(b)(ii) of the Act and, if so, as to the sum that Mr Wiekart should contribute to the assets of Alpha Box.
[46] I am satisfied it is appropriate to make an order. The issue is as to quantum.
[47] The liquidators seek an order that Mr Wiekart should contribute the full amount paid away, that is $1,021,692.83. The Court usually considers such an order just and fair if it determines that a director has breached ss 131 or 133 of the Act.22
[48] If such a sum were contributed, the liquidators would pay the sum due to the IRD and the (reasonable) costs of liquidation. Whatever sum should be required to meet these items, it will be much less than the contribution the liquidators seek. Since Mr Wiekart is the sole shareholder, any surplus would have to be paid to him,
so there will be a degree of circularity.
21 Blanchett v Keshvara (2011) 10 NZCLC 264,963 (HC), [2011] NZCCLR 34 (HC).
22 See Morgenstern v Jeffreys [2014] NZCA 449, (2014) 11 NZCLC 98-024 at [99]-[100]; Robb v Sojourner [2007] NZCA 493, [2008] 1 NZLR 751; FXHT Fund Managers (in liq) v Oberholster [2010] NZCA 197 at [28]-[30] and Blanchett v Keshvara, above n 21.
[49] Ultimately, however, I have decided that it is just and fair to make the order sought by the liquidators, and to put to one side the fact that Mr Wiekart is also the sole shareholder. It will be for the liquidators to determine whether the company’s requirements and best interests might be met by the contribution of a lesser sum.
[50] I shall not award interest, as that would yield an even greater surplus to the liquidators. I shall, however, make the order they seek for costs and disbursements.
Result
[51] The Defendant, a director of Alpha Box Property Holdings Limited, has been guilty of breach of duty in relation to Alpha Box Property Holdings Limited.
[52] In the exercise of discretion I order the Defendant to contribute
$1,021,692.83 to the assets of Alpha Box Property Holdings Limited by way of compensation.
[53] The liquidators are entitled to costs on a 2B basis and reasonable disbursements. The parties may file memoranda if they are unable to agree quantum.
..................................................................
M Peters J
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